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Who gets nuclear spoils?

• Robert Peston
• 24 Jul 08, 01:00 PM

It's been one of the longest negotiations in corporate history, but I have learned that of France - in partnership with - is likely to announce early next week that it is buying , the UK's nuclear power generator, for more than 拢12bn.

"There's a push to conclude a deal before the holiday," said an executive close to the companies. "We hope it will be done in the next few days".

The owner of eight UK nuclear power stations has been on the auction block for months, largely because the government wants to sell its significant "economic interest", which is equivalent to a stake of more than a third in the company.

British Energy's board is insisting that EDF pay more than 750p a share, perhaps as much as 775p - which would value the company at well over 拢12bn - having rejected an offer of 680p made by EDF in May.

The deal is not yet finalised and could still be delayed. But as and when the deal is done, up to a quarter of Britsh Energy is likely to remain British.

Centrica, owner of British Gas, is negotiating with EDF to be its minority partner in the acquisition and may end up paying around 拢3bn for a 25% stake in British Energy.

That should give Centrica preferential access to future nuclear power and a valuable hedge against future movements in energy prices.

The sale of BE to EDF would be controversial for many reasons - such as whether EDF should have exclusive rights to develop a new generation of power plants on BE's existing sites and whether a business of strategic importance to the UK's future energy needs should be handed to a company controlled by the French government.

But I am going to look at an issue that's just as important but has been largely ignored: what will happen to the 拢4bn plus that would be received by the Department for Business when its stake is sold?

The proceeds are to be given to an institution called the , to pay for the huge future costs of decommissioning British Energy's existing nuclear power station and making them safe. Those costs would be huge - many tens of billions of pounds.

The Nuclear Liabilities Fund has already received more than 拢2bn, after the government sold some of its British Energy stake (at a price much lower than today's) to investors.

Now it's what happened to that cash after it was received by the Nuclear Liabilities Fund that could prove highly controversial: the money was lent back to the government by being put into the National Loans Fund. That's a safe place to put the money, but the rate of interest paid by the National Loans Fund is miserly - just over 5% at the moment - and there's no opportunity for capital appreciation.

So there's zero chance of that money growing in value enough to make a serious dent in the future costs of decommissioning, unless the cash were taken out of the National Loans Fund and reinvested in a range of assets that offer the possibility of capital appreciation.

Or to put it another way, there's an argument that the Nuclear Liabilities Fund ought to be allowed to behave like those that have been created from the Middle East to China, which are investing their respective nations' wealth for the long term.

So why did the money end up in National Loans Fund?

Well, maybe going for security last year, when markets were in turmoil made some sense.

However it may also be relevant that deposits into the National Loans Fund count as deductions from public sector borrowing. In other words, when the money goes there, it makes the public finances look stronger.

Which also means, at a time when the public finances are looking a bit shakey, that it's pretty difficult for the Nuclear Liabilities Fund to take all that cash out of the National Loans Fund - to do so would be to inflate public sector borrowing figures, at a time when they already look pretty ghastly.

The Nuclear Liabilities Fund will also be under immense pressure from the Treasury to put the next lot of BE proceeds, that chunky 拢4bn, into the National Loans Fund.

If it were to do that, some would argue that the government would be putting its short-term financial interests ahead of the long-term nuclear safety of the UK.

So what if the trustees of the Nuclear Liabilities Fund simply told the Treasury to hop off?

Well, they could try. But my understanding is that the government has retained the right to instruct those trustees what to do with their cash. So the trustees may end up having no choice but to use the British Energy proceeds to shore up the public finances, rather than to insure all of us against the mindboggling costs of cleaning up nuclear Britain.

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